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Fiscal discipline essential as nation goes deeper into debt

25 Jun 2020 / 11:30 H.

OUR national debt could hit the statutory limit of 55% of gross domestic product at the end of this year from 52% currently.

In revealing this, Finance Minister Tengku Datuk Seri Zafrul Abdul Aziz said this is due to the implementation of measures to save lives, protect livelihoods and stimulate the economy.

There was a RM260 billion Prihatin Rakyat economic stimulus plan (Prihatin), followed by the RM35 billion short-term economic recovery plan (Penjana).

According to Prime Minister Tan Sri Muhyiddin Yassin, the direct fiscal injection is RM25 billion.

Malaysia isn’t alone in this. South Korea’s government debt has sky-rocketed to 840.2 trillion won (US$693 billion) following its fiscal measures aimed at stimulating the country’s economy that has been hit by the Covid-19 pandemic.

It recorded an increase of 111 trillion won in national debt in just six months when its economy was ravaged by the pandemic.

According to Standard and Poor’s and the Organisation for Economic Cooperation and Development (OECD), the debt of all nations reached US$53 trillion in Q1 of 2020. Of this figure, 34 of the world’s richest nations borrowed US$11.4 trillion.

Since 97% to 98% of Malaysia’s debt is domestic, it limits the country’s exposure to foreign currency fluctuation risks.

Going forward, the government has to ensure fiscal discipline. Its immediate target is to reduce the fiscal deficit to below 4% within the next three to four years, according to the finance minister.

It is obvious now that most governments, including Malaysia, cannot further stretch themselves fiscally when it comes to rolling out economic rescue packages to cushion the blow of pandemic.

Industry players have been asking the government to add new impetus to save sectors that are moribund. That is definitely not viable now as our financial planners look at rehabilitating our fiscal landscape.

Several options are on the table, including quantitative easing. According to the International Strategy Institute (ISI), Bank Negara Malaysia can buy government bonds and other financial assets through the printing of money.

As more money circulates in the economy, people’s spending power increases, it pointed out. However, this will only work if the economy is growing. Otherwise, countries could be looking at economic ruin.

Read this story on our iPaper: Fiscal discipline essential as nation goes deeper into debt

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